Effect Of Invoice Factoring On The Cash Flow Cycle
Let’s take a quick look at Invoice Factoring again, after all it is our main service offered to small businesses so we are allowed to plug it once and a while.
The typical business cash flow cycle involves delivery of goods or services, along with the invoice to the customer, who then makes the payment within the stipulated time of 30 to 90 days. Naturally, the business has to wait a long time before it realizes its payments.
If the business uses the factoring or discounting arrangement, the sequence of actions is different. Here the business owner delivers products or services to customers along with the invoice. The invoice is also sent to the factor or discounter who releases a percentage of the invoice value to the business owner, which could be about 80% within 48 hours. Eventually, the customer makes its payment to the factor/discounter if it is a factoring discounting arrangement. Alternately, the customer credits it directly into a bank account controlled by the factor or discounter in the business owner’s name if it is an invoice discounting arrangement. After the payment is received by the factor/discounter, the balance of 20%, less fees and other charges is paid to the business owner.
Thus, the business owner is able to access up to 80% of its invoice value within 48 hours, rather than wait up to 90 days for the customer to pay.